As shale wells grow longer, buyouts attract hemmed in oil producers

Abraxas Petroleum

30/03/2018 15:52

By Ernest Scheyder
    HOUSTON, March 30 (Reuters) - A recent drought in oil
company mergers and acquisitions could be coming to an end over
a new Texas range war: U.S. shale producers are building
miles-long horizontal wells that are running into their rivals'
land holdings. 
    This week, U.S. shale producer Concho Resources Inc  CXO.N 
said longer horizontal wells are among the factors spurring its
$8 billion deal for rival RSP Permian Inc  RSPP.N , with well
spacing and sharing infrastructure needs also playing roles. RSP
Permian controlled the land adjacent to its own in many cases.
 urn:newsml:reuters.com:*:nL3N1RA47W 
    The average length of U.S. shale wells has grown by roughly
1,500 feet, or 25 percent, in the past three years to 7,213
feet, according to RS Energy Group, an energy investment data
provider. Producers are drilling longer shale wells - some
exceed three miles - to extract more crude from each well. 
    Oil company M&A fell in the wake of the 2014 oil price crash
and more producers refocused on their best holdings. The value
of U.S. oil producer deals last year was less than half the
$137.7 billion in 2013, according to data provider PLS Inc. That
could be changing in West Texas's Permian, the largest U.S.
oilfield, where checkerboard-like leases dating to land grants
made to railroads in the 19th century are hemming in producers. 
    "Consolidating acreage is going to be extremely meaningful,"
said Brook Papau, managing director of RS Energy. "We'll see
more deals."
    Smaller companies with prime acreage, especially on the
Permian's western edge, could be buyout candidates, including
Abraxas Petroleum  AXAS.O , Lilis Energy  LLEX.A  and Jagged
Peak Energy  JAG.N , industry analysts have told Reuters.
    Shared transport systems, such as oil and gas gathering and
water disposal, also are driving the need for scale and property
acquisitions in addition to horizontal wells, called laterals,
Concho Chief Executive Tim Leach said this week. 
    "Long laterals and (avoiding) the parent-child relationship"
where close well spacing reduces output, drove the deal, said
Leach. "Large, contiguous blocks of acreage are strategic," he
told investors. 
    After dropping 8.7 percent on the steep purchase price,
Concho shares on Thursday retraced much of the fall, rising 5
percent to $150.33. 
    "The investment community has consistently espoused the
merits of consolidation within a highly fragmented business,"
said Simmons & Co analyst David Kistler in a note to clients
praising the Concho-RSP deal.
    Still, M&A is not the only way to get more adjacent land.
Chevron Corp  CVX.N  last year swapped or sold more than 60,000
acres in the Permian Basin. 
    The deals, Chevron CEO Mike Wirth said in a February
earnings call, "create value by consolidating land positions,
allowing longer laterals and other infrastructure efficiencies."

 (Reporting by Ernest Scheyder; Editing by Andrea Ricci)
 ((ernest.scheyder@thomsonreuters.com; Twitter: @ErnestScheyder;
+1-713-210-8512; Reuters Messaging:
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